TAX FORM/RETURN PREPARATION PROBLEM Bottle Up Inc

C:11-63 Bottle-Up, Inc., was organized on January 8, 2000, and made its S election on January 24, 2000. The necessary consents to the election were filed in a timely manner. Its federal tax identification number is 38-1507869. Its address is 1234 Hill Street, Gainesville, FL 32607. Bottle-Up uses the calendar year as its tax year, the accrual method of accounting, and the first-in, first-out (FIFO) inventory method. Bottle-Up manufactures ornamental glass bottles. It made no changes to its inventory costing methods this year. It uses the specific identification method for bad debts for book and tax purposes. Herman Hiebert (S.S. No. 123-45-6789) and Melvin Jones (S.S. No. 100-67-2000) own 500 shares each. Both individuals materially participate in Bottle-Ups single activity. Herman Hiebert is the tax matters person. Financial statements for Bottle-Up for the current year are shown in Tables C:11-2 through C:11-4. Assume that Bottle-Ups business qualifies as a U.S. production activity and that its qualified production activities income is $90,000. The S corporation uses the small business simplified overall method for reporting these activities (see discussion for Line 12d of Schedules K and K-1 in the Form 1120S instructions). Prepare a current year S corporation tax return for Bottle-Up, showing yourself as the paid preparer.

TABLE C:11-2

Bottle-Up, Inc. Income Statement for the Year Ended December 31 of the Current

Year (Problem C:11-63)

Sales

$2,500,000

Returns and allowances

(15,000 )

Net sales

$2,485,000

Beginning inventory

$102,000

Purchases

900,000

Labor

200,000

Supplies

80,000

Utilities

100,000

Other manufacturing costs

188,000 a

Goods available for sale

$1,570,000

Ending inventory

(96,000 ) 1,474,000 b

Gross profit

$1,011,000

Salaries c

$451,020

Utilities expense

54,000

Depreciation (MACRS depreciation is $36,311)

11,782

Automobile and truck expense

26,000

Office supplies expense

9,602

Advertising expense

105,000

Bad debts expense

620

Rent expense

30,000

Interest expense d

1,500

Meals and entertainment expense

21,000

Selling expenses

100,000

Repairs and maintenance expense

38,000

Accounting and legal expense

4,500

Charitable contributions e

9,000

Insurance expense f

24,500

Hourly employees fringe benefits

11,000

Payroll taxes

36,980

Other taxes

2,500

Penalties (fines for overweight trucks)

1,000 (938,004)

Operating profit

$72,996

Other income and losses:

Long-term gain on sale of capital assets

$48,666g

Sec. 1231 loss

(1,100) h

Interest on U.S. Treasury bills

1,200

Interest on State of Florida bonds

600

Dividends from domestic corporations

11,600

Investment expenses

(600) 60,366

Net income

133,362

a. Total MACRS depreciation is \$74,311. Assume that \$38,000 of depreciation has been allocated to cost of sales for both book and tax purposes so that the book and tax inventory and cost of sales amounts are the same. The AMT depreciation adjustment on personal property is \$9,000.

b. The cost of goods sold amount reflects the Uniform Capitalization Rules of Sec. 263A. The appropriate restatements have been made in prior years.

c. Officer salaries of $120,000 are included in the total. All are employers W-2 wages.

d. Investment interest expense is $500. All other interest expense is trade- or business-related. None of the interest expense relates to the production of tax-exempt income.

e. The corporation made all contributions in cash to qualifying charities.

f. Includes $3,000 of premiums paid for policies on lives of corporate officers. Bottle-Up is the beneficiary for both policies.

g. The corporation acquired the capital assets on March 3, 2007 for \$100,000 and sold them on September 15, 2009, for $148,666.

h The corporation acquired the Sec. 1231 property on June 5, 2008 for \$10,000 and sold it on December 21, 2009, for $8,900.

TABLE C:11-3

Bottle-Up, Inc. Balance Sheet for January 1 and December 31 of the Current Year

(Problem C:11-63)

January 1

December 31

Assets:

Cash

$15,000

$116,948

Accounts receivable

41,500

45,180

Inventories

102,000

96,000

Stocks

103,000

74,000

Treasury bills

15,000

16,000

State of Florida bonds

10,000

10,000

Building and equipment

374,600

375,000

Minus: Accumulated depreciation

(160,484)

(173,100)

Land

160,000

190,000

Total

$660,616

$750,028

Liabilities and equities:

Accounts payable

$36,000

$10,000

Accrued salaries payable

12,000

6,000

Payroll taxes payable

3,416

7,106

Sales taxes payable

5,200

6,560

Due to Mr. Hiebert

10,000

5,000

Mortgage and notes payable (current maturities)

44,000

52,000

Long-term debt

210,000

260,000

Capital stock

10,000

10,000

Retained earnings

330,000

393,362

Total

$660,616

$750,028

TABLE C:11-4

Bottle-Up, Inc. Statement of Change in Retained Earnings, for the Current Year

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